The Search Fund For The Digital Age

Aug. 21, 2018

BY ANTONIO ALTAMIRANO

   

Tangelo thrives on reinvention. We look at Venture Capital as an industry that empowers entrepreneurs and while VC works for high-growth ventures, many consumer companies lack adequate investment mechanisms necessary to reach the fast-growth stage. This post analyzes the classic Search Fund model and provides an in-depth alternative to scale this model for the digital age. This was partly inspired by Marc Andreesen's essay titled Software is Eating The World and our extensive experience growing technology ventures as well as executing turnarounds for companies in the recycling, cosmetics, health and high-tech industries.

The Classic Search Fund Model

According to the Stanford Graduate School of Business, a search fund is an investment vehicle, conceived in 1984, through which investors financially support an entrepreneur’s efforts to locate, acquire, manage, and grow a privately held company.

Search funds have been structured to mitigate many of the risks associated with purchasing a medium business. To date, over 100 search funds have been raised and according to a Search Fund study conducted by Stanford a portfolio of first time search funds produced annual returns of 52%.

Updating The Classic Search Fund For The Digital Age

Updating The Classic Search Fund For The Digital Age

The investment model we developed is a variation on the classic search fund model described above. The main characteristics that our model looks for are the following:

  1. Multiple ventures (companies) within the same vertical
  2. Similar annualized sales volume
  3. Growth market
  4. Low digital IQ
  5. High customer empathy

We call this model the Search & Transformation Fund.

The main advantage is to sidestep companies with glaring operational issues and focus on undervalued mid-cap companies with a high quality product. Once a company is identified, the Search and Transformation Fund Model applies and accelerates digital and growth strategies. The goal is to automate logistics and speed up time-to-market while increasing margins.

Why Now?

Approximately $4.8 trillion of net worth, representing the largest intergenerational shift of wealth in U.S. history, will be transferred over the next 20 years as virtually all closely-held and family-owned businesses. Opportunities to acquire lower middle market businesses will be greater than demand. These businesses fall below the investment parameters of most buyout firms and are often too large for private buyers.

Direct sourcing of these opportunities requires a significant time investment that is oftentimes not feasible for private equity firms due to their limited professional staffs. As a result, acquisition multiples in the lower middle market are lower than those found up-market.

47% of these companies haven’t started to embark on Digital Transformation and 88% of these firms say that they will catch-up via using a third party provider to execute an accelerated plan.

What’s New On The Search & Transformation Fund Model?

Focused on profitable mid-cap companies that use traditional distribution channels and lack digital and technical expertise.

Expert Application of Technology

This model aims to make multiple companies more efficient through technology, whereas a Search Fund focuses only on turning around one company. The model seeks to help the investors and the company accelerate change by:

  1. Accelerating ROI
  2. Bring in value-add investors

Opportunity for Value Creation

As a first step, we propose building an experienced Board of Directors and management team who embrace our traditional values of hard work, integrity, humility and teamwork. Second, Tangelo and the management team will work to add rigor to existing business processes and digitally transform the company to serve as a foundation for growth. Finally, the team will look to prudently to pursue underexploited growth initiatives organically and potentially through select “tuck-in” acquisitions.

How is a Search & Transformation Fund positioned?

How is a Search & Transformation Fund positioned?

  1. Minimal capital needed to launch a Search and Transformation Fund
  2. Favorable for the investor backing the Search and Transformation fund
  3. Favorable for the entrepreneur
  4. Experienced team managing the Digital Transformation
  5. More opportunities to de-risk investment
  6. ROI realized at a faster pace
  7. Opportunity to consolidate multiple companies into a megabrand

Search & Transformation Fund Comparison

The Search and Transformation Fund model is executed over five distinct stages, the entirety of which can last anywhere from 2 to 4 years.

Search & Transformation Fund Comparison

Five Stages of the Search & Transformation Fund

Five Stages of the Search & Transformation Fund
BY ANTONIO ALTAMIRANO
DIGITAL AGE, SEARCH FUND